Investing in Gaming Companies

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I wanted to write a post sharing my thoughts about gaming (computer games) companies, and give a tour of how I think about computer games from the investors vantage point. First, let me share my history regtarding computer games! I have been playing computer games for as long as i can remember, for example, I purchased both Counter-Strike 1.6 and Counter-Strike:Source in 2006, at 12 years of age. Counter-Strike is probably the most well known competitive FPS game today, inspired by Quake and Unreal Tournament. The next game I played a lot was probably Left-4-Dead, purchased in 2009, which is a team based first-person shooter, where 4 players are “Survivors” in a zombie apocalyupse, and 4 players control special zombies whose goal it is to stop the survivors from reaching the safe house. I played this quite a lot with a mate, where we would try to find alternative routes, and often rushed the opponents. Unfortunately I did not enjoy the second Left 4 Dead game quite as much as the first game. During the same time period, I played some Team Fortress 2, before getting into League of Legends. I started playing LOL in 2010, and I played it extensively untill early 2012, which is when I got my hands on a Dota 2 beta key. At the time of writing this, I have played over 2700 hours of Dota 2, making it the most played game in my arsenal by far. I played Dota 2 through all of high school, but quit as i began studying at a univeristy. Since then it has been sort of a “on-and-off” relationship between me and Dota 2. I have also tried out several other games, such as Starcraft 2, Guildwars 2, Terraria, the Battlefield games, the Assassins Creed games, GTA, et cetera. Currently im mainly playing Overwatch, where I have over 400 hours on record. Other games where I have a not-insignificant amount of hours on record are: the Counter-Strike games (CS1.6, CS:S, and CS:GO), where I have collectively over 360 hours, 340 hours of TF2, guessing over 400 hours of League of Legends, 250 hours of Left 4 Dead, and 80 hrs of L4D2. Add to that several games where I have around 100 hours of playtime, such as Dungeon Defenders, Garrys Mod, Terraria, Subnautica, Oxygen Not Included, and Global Agenda. Plus several other games where I dont know how many hours I have on record. Thus, to summarize, I am a major computergame enthusiast. I love playing computergames, and I love getting better in said games. Regarding genres, I have played mostly Real-Time Strategy games (RTS) and First-Person Shooters (FPS), but I also enjoy other games such as Storyline based role-playing games (RPG), and survival games.

This is all fantastically interesting, but lets talk games, and what makes these games popular and “good”.

I think it is wise to categorize games into different “classes” of games. Lets divide them into “Competitive”, and “Recreational” and “Super Casual”. This might probably be more of a scale, in reatlity. Thus it is not black and white, but there is rather a gradient where a game is somewhere between competitive and recreational/casual. The purpose of these categories is to help understand which games compete against which, since I guess we can all agree that Candy-Crush does not in any way compete with Couter-Strike:Global Elite or Starcraft, but does Fortnite compete with Call of Duty? I’ll give some sort of description of the categories below.

Competitive
A game gets put in this category if it has a significant level of tournaments and a competitive scene. Games in this category often have very high skill ceelings, and may be played in team-vs-team setings, or in a one-vs-one stetting. Some examples of competitive games are Quake, Starcraft and Starcraft 2, the Counter-Strike games, Dota 2, League of Legends, and Overwatch. Competitive games compete with other competitive games, and take a significant time investment by the player base in order to get to the average level of skill. One interesting aspect of competitive games is to analyze the distribution of the player base. In other words, how many players play the game competitively and how many play it casually. Sort of the skewedness of the player population. For example, im guessing that Starcraft 2 has less casual players in relationship to the number of competitive players, whereas Overwatch has a flatter distribution, meaning that more casual players play it in relation to the number of pro players. Competitive games often have pro players, some which can play for a living, and a wide following of game enthusiasts. Im thinking that this segment targets teens and younger adults, let’s say 15- to 30 year-olds, playing on PC.

Recreational
This category includes all games that are single-player games, games focused on the story telling, or less competitive multiplayer games, et cetera. This is probably the most populated category of games, since most games are not aimed at being a hardcore competitive game, but more emphasis on the story, the player experience, and other factors like that. These games are played for the fun of it, for an amazing player experience, or in a similar way of reading a fiction book or watching a movie. Some of the games in the recreational category are the Fallout games, Assassins Creed Franchise, GTA franchise, Elder Scrolls franchise, the Battlefield franchise, et cetera. This is the broadest category in terms of target audience, which is everything from 10- to 45- year-olds, playing on PC or XBOX, PlayStation, Nintendo consoles, et cetera.

Super CasualThis genre captures most mobile games, such as Candy Crush Saga, and most other games whose name ends with “Saga”. It also includes browser games, and so on. This genre is mostly directed towards a new generation of “gamers”. These games are played when there is some time to kill, such as on the commute, commercial break on the TV, waiting for the coffe to brew, etc.

Now that we have these arbitrary categories setteled, lets talk about the gaming eco system. Behold my fantastic MS Paint skills! I’ll go through this “model” step by step, and share my thinking on how this all ties together, and hopefully shed some light on the business of games. This should be preceeded by a disclaimer, that I am only speculating, and have no actual experience of working within the gaming industry. This is how I think the gaming industry ties together.

The first point is the Creators of the games, the game studio or game company. This is where companies such as Activision Blizzard, Electronic Arts, Ubisoft, TakeTwo interactive, Paradox Interactive, Nintendo, Square Enix, G5 Entertainment, et cetera. These actors create the games and the intellectual properties surrounding it (brand, story, characters, et cetera), and they make money from selling copies of games, subscriptions, or from in game transactions, (known as micro-transactions). These parties have to get the games to their target audience, and this can either be done with the help of a publisher, or by themselves (known as independently, which makes them an “indie developer”).

Publishers help content creators in their efforts to push the finished game to market. Most of the larger content creators also have very developed publishing divisions, and there are players focusing mainly on publishing. Notable publishers are Nintendo, EA, ActivisionBlizzard, Microsoft, Sega, 505 Games, Ubisoft, Konami, and Telltale Games. These guys make money from the sales of the games that they publish, and are commonly partnering with certain game developers, since they both profit from a successful game launch.

The games published has to reach the end user somehow, this is either through Retail (physical copies), or through Digital distribution. This has obviously shifted from exclusively retail, where you had to go to the store and buy a ohysical copy of the game, to digital distribution, where you purchase the game online, and then receive a digital copy of the game. This has brought distribution costs down significantly, ince there is no need for pushing the games into stores such as GameStop, and there is no need to distribute shipments of CD’s or DVDs. The largest distribution platform for PC is probably Steam, which is owned by Valve. For consoles, there are the respective marketplaces for XBOX and PlayStation. There are also alternatives to Steam, such as EA’s Origin, and CD Project Red’s GOG (Good Old Games), Blizzards own platform BattleNet, and probably others. My guess is that Steam dwarfs all other digital distribution platforms on PC.

Once the game reaches the hands of the Consumer, he or she obviously plays the game. This brings us to a second ecosystem, which is Streaming, E-Sports, and the Pro-scene. Streaming refers to the group of players that stream their gameplay through (most popularly) Twitch, owned by Amazon, or other newer streaming services such as Mixer, YouTube Gaming, even Twitch or Facebook. Many players also make video content from their gameplay, most commonly for a YouTube audience. There is a fraction of players that can actually do this for a living, where they earn their wages through ad-revenue. Furthermore, there is a wide E-Sports scene, where players actually play professionaly. This is a topic for another time, but here is a placeholder for a future post on the topic of investing in E-Sports.

Let’s talk about investing opportunities in this fantastically interesting sector! Most publicly available inveting opportunities are contained to the content creators, some of which also have publishing divisions or own publishing companies. I think there are three main factors to concider when analyzing video game companies.

These factors are:

Are their games good

What business model do they use

Standard financial evaluation

In order to evaluate the first point, we have to figure out which category of games the title belongs in. Then, one must compare it to other games in that category. This comparison should be limited to the games genre, making pairs of ccategory and genre, for example “Competitive FPS”, “Recreational Adventure”, “Supercasual FPS”, “Recreational Horror”. If there is a new adventure game announced, one has to try and evaluate if it is a competitive game, recreational game, or super casual, in order to compare it to other games on the same level of competitiveness. This is why comparing Counter-Strike to candy crush is ridiculus, while comparing DOTA 2 to League of Legends is not. The “goodness” of the game is often very difficult to predict, but I recommend watching actual gameplay footage if there is any released, or watching trailers. When watching trailers, note if the trailer is inside the actual game engine, or a “video”. In other words, is the trailer generated within the game itself, or is it merely a “mockup” video. If it is a video, disregard any grapichs you see, but you can observe, for example, how deep the characters feel, how is the world in which the game is set, is the story compelling, et cetera. If the footage is “actual game footage”, then also note how the visuals look, but be reminded that graphics and visuals are secondary to gameplay. Gameplay is king, visuals is queen. Other clues on how “good” the game is, can be drawn from the studios previously released games. A studio or company that has a history of releasing good games are more likely to keep releasing more good games. And vice versa. Evaluating publisher and game developers history can be done bye examining how the previously released games have performed. Look at the rankings on Steam, the reviews, viewer data from Twitch, et cetera. It is important that you get an idea of how good you think the products have been historically. Finally, I’d advice to check Reddit, specifically if there is a subreddit for the game or the previous games released.

This post is under construction, and is published unfinished. This is where I left off, and I expect to finish writing this post soon.

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This site is for entertainment purposes only. Nothing you read on this site constitutes financial advice, nor is it a solisitation to buy or sell assets. I, the author, only present my own personal opinion, and may have positions in the securities mentioned on this site. Never make an investment decicion based solely on what you read here.